After a bullish earnings report from Nvidia (NVDA), more quarterly reports in the technology sector are on the horizon, including Leaderboard stock Salesforce (CRM). Salesforce stock has been showing relative strength in the enterprise software group, one of the leading industry groups in the stock market currently.
Buyers have been pushing Salesforce stock higher, along with several security software stocks that are also on the earnings calendar. Palo Alto Networks (PANW) just reported a strong quarter, helping lift the security software group to a gain of 2.2% Wednesday. Other fast-growing stocks in the group set to report earnings include CrowdStrike (CRWD), Okta (OKTA) and Zscaler (ZS).
In the semiconductor sector, Broadcom (AVGO) reports Thursday after the close. Broadcom’s relative strength line has shot into new-high ground along with the stock after the company inked a multibillion-dollar supply deal with Apple (AAPL). Broadcom will supply Apple with radio-frequency and wireless-connectivity components.
Salesforce Stock Shows Strength
Salesforce stock soared in early March after the company reported earnings and gave strong guidance. Adjusted profit doubled to $1.68 a share, with revenue up 14% to $8.38 billion. The results handily beat expectations, and Salesforce also gave bullish full-year operating margin guidance. The company also forecast full-year revenue of $34.6 billion, ahead of the consensus estimate at the time of $33.9 billion.
Profitability has been a focus for Salesforce amid increasing activist pressure from the likes of Elliott Management, Starboard Value and Third Point, among others. Salesforce recently disbanded a board committee on mergers and acquisitions, implying it won’t be actively seeking acquisitions after paying $6.5 billion for MuleSoft in 2018 and $27.7 billion for Slack in 2021.
Last year, Salesforce’s board approved a $10 billion share buyback. It boosted the buyback by another $10 billion as part of its last earnings release.
For the current quarter, the Zacks consensus estimate is for adjusted profit to rise 64% to $1.61 a share. Revenue is expected to rise 10% to $8.17 billion.
Security Software In Focus
Okta is near the top of an eight-week cup base, with results due Wednesday after the close. CrowdStrike also reports late Wednesday.
Okta provides a cloud-based identity and access management platform, allowing organizations to manage user identity and access across multiple systems.
Adjusted profit at Okta is expected to rise 144% to 12 cents a share. Revenue is seen rising 23% to $510.6 million.
Security software stocks tend to sell at high valuations due to strong track records of growth and compelling growth prospects. For its current fiscal year 2024, Okta is expected to earn 76 cents a share, with growth ramping up in 2025, up 47%.
CrowdStrike is holding gains well after climbing above its 200-day moving average. An Accumulation/Distribution Rating of A- is helped by several higher-volume gains in recent weeks.
Zscaler, meanwhile, is stuck for now below its 200-day line. Results are due Thursday after the close, along with those of database software firm MongoDB (MDB).
MongoDB continues to hold near highs after a breakout from a bottoming base on May 9.
Options Trading Strategy
A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Salesforce stock.
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First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.
In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.
You earn profits when the stock falls below the strike price with a put option.
Check Strike Prices
Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at Cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.
Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
See Which Stocks Are In The Leaderboard Portfolio
This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.
Salesforce Stock, Okta Option Trades
Here’s how a recent call option trade looked for Salesforce, a liquid name in the options trading market.
When Salesforce stock traded around 210, an in-the-money weekly call option with a 210 strike price (June 2 expiration) came with a premium of around $8.10 per contract, or nearly 3.9% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Salesforce stock at $210 per share. The most that could be lost was $810 — the amount paid for the 100-share contract.
When taking the premium paid into account, Salesforce stock would have to rally past 218.10 for the trade to start making money (210 strike price plus $8.10 premium per contract).
A call-option trade for Okta was pricey. When the stock traded around 84.75, a slightly out-of-the-money call option with an 85 strike price (June 2 expiration) offered a premium of $5.25, or 6.2% of the stock price.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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